The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017 AND 2016
(Unaudited)
1.
|
Description of Business and Basis of Presentation:
|
References in this Quarterly Report
on Form
10-Q
to we, our, Mastech Digital, Mastech or the Company refer collectively to Mastech Digital, Inc. and its wholly-owned operating
subsidiaries, which are included in these Condensed Consolidated Financial Statements (the Financial Statements).
Description of Business
We are a provider of IT staffing and digital transformation services. Our IT staffing business combines technical expertise with business
process experience to deliver a broad range of services within business intelligence / data warehousing; service oriented architecture; web services; enterprise resource planning & customer resource management; eBusiness solutions; mobile
applications; data management and analytics; and the implementation and support for cloud-based applications. We work with businesses and institutions with significant IT spending and recurring staffing service needs. We also support smaller
organizations with their project focused temporary IT staffing requirements. Our services span a broad range of industry verticals including: automotive; consumer products; education; financial services; government; healthcare;
manufacturing; retail; technology; telecommunications; transportation; and utilities.
Recent Developments
On July 13, 2017, the Company completed the acquisition of the services division of Canada-based InfoTrellis, Inc., a project-based
consulting services company with specialized capabilities in data management and analytics. The acquisition is expected to significantly strengthen Mastech Digitals capabilities to offer consulting and project-based delivery of digital
transformation services. InfoTrellis, Inc. is headquartered in Toronto, Canada, with offices in Austin, Texas and a global delivery center in Chennai, India.
The transaction is valued at $55 million, with $35.7 million paid in cash at closing (subject to working capital adjustments) and
$19.3 million deferred over the next two years. The deferred purchase price is contingent upon the acquired business generating specified EBIT (earnings before interest and taxes) targets during the two years following closing.
The funding for the transaction consisted of a combination of debt and equity. A new $65 million facility the Company established on
July 13, 2017 with PNC Bank, N.A. (PNC) provided debt financing for the transaction, refinancing for the Companys existing debt with PNC and additional borrowing capacity for the future. The equity financing was completed
through a $6.0 million private placement of newly-issued shares of the Companys common stock to Mastechs founders and majority shareholders, Ashok Trivedi and Sunil Wadhwani. Pursuant to the terms of the share purchase agreements
executed in connection with the private placement of these shares, the Company agreed to sell such shares at a price per share equal to the greater of $7.00 or the closing price for the common stock on July 10, 2017 (two business days after the
July 7, 2017 announcement of the transaction), which was $6.35 per share. Accordingly, the common stock was sold on July 13, 2017 at a price per share equal to $7.00. The terms of the private placement were negotiated and approved by a
Special Committee of the Companys independent directors, which retained counsel and an independent financial advisor.
On
July 13, 2017 and July 19, 2017, the Company filed with the Securities and Exchange Commission two Current Reports on Form
8-K
providing additional details on this acquisition and the financing
arrangements.
Accounting Principles
The accompanying Financial Statements have been prepared by management in accordance with U.S. generally accepted accounting principles
(GAAP) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission (the SEC). Accordingly, they do not include all of the information and disclosures required by U.S. GAAP
for complete consolidated financial statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Financial Statements and the accompanying notes. Actual results could differ from these estimates. These Financial
Statements should be read in conjunction with the Companys audited consolidated financial statements and accompanying notes for the year ended December 31, 2016, included in our Annual Report on Form
10-K
filed with the SEC on March 24, 2017. Additionally, our operating results for the
7
three and six months ended June 30, 2017 are not necessarily indicative of the results that can be expected for the year ending December 31, 2017 or for any other period.
Principles of Consolidation
The Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
Reclassification
As Discussed in Note 14, Recently Issued Accounting Standards, the Company adopted ASU
2015-17
Balance Sheet Classification of Deferred Taxes on a retrospective basis during the first quarter of 2017. Accordingly, the impact of this retrospective adoption was a reclassification of $26,000 of
non-current
deferred tax liabilities and $280,000 of current deferred tax assets as a net
non-current
asset of $254,000 as of December 31, 2016. This presentation
conforms to the June 30, 2017 balance sheet.
Critical Accounting Policies
Please refer to Note 1 Summary of Significant Accounting Policies of the Consolidated Financial Statements and
Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies and Estimates in our Annual Report on Form
10-K
for the year ended
December 31, 2016 for a more detailed discussion of our significant accounting policies and critical accounting estimates. There were no material changes to these critical accounting policies during the six months ended June 30, 2017.
Segment Reporting
The Company had one reportable segment in accordance with ASC Topic 280 Disclosures About Segments of an Enterprise and Related
Information as of June 30, 2017.
2.
|
Goodwill and Other Intangible Assets, net
|
Goodwill related to our June 15, 2015
acquisition of Hudson Global Resource Managements U.S. IT staffing business (Hudson IT) totaled $8.4 million.
The
Company is amortizing the identifiable intangible assets on a straight-line basis over estimated average lives ranging from 3 to 12 years. Intangible assets were comprised of the following as of June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017
|
|
(Amounts in thousands)
|
|
Amortization
Period (In Years)
|
|
|
Gross Carrying
Value
|
|
|
Accumulative
Amortization
|
|
|
Net Carrying
Value
|
|
Client relationships
|
|
|
12
|
|
|
$
|
7,999
|
|
|
$
|
1,361
|
|
|
$
|
6,638
|
|
Covenant-not-to-compete
|
|
|
5
|
|
|
|
319
|
|
|
|
130
|
|
|
|
189
|
|
Trade name
|
|
|
3
|
|
|
|
249
|
|
|
|
170
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets
|
|
|
|
|
|
$
|
8,567
|
|
|
$
|
1,661
|
|
|
$
|
6,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three and six month periods ended June 30, 2017 was $204,000 and $407,000,
respectively, and is included in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations. For the three and six month periods ended June 30, 2016 amortization expense was $203,000 and $406,000,
respectively.
The estimated aggregate amortization expense for intangible assets for the years ending December 31, 2017 through 2021
is as follows:
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
|
(Amounts in thousands)
|
|
Amortization expense
|
|
$
|
813
|
|
|
$
|
769
|
|
|
$
|
731
|
|
|
$
|
696
|
|
|
$
|
667
|
|
3.
|
Commitments and Contingencies
|
Lease Commitments
The Company rents certain office space and equipment under
non-cancelable
leases which provide for
future minimum rental payments. Total lease commitments have not materially changed from the amounts disclosed in the Companys Annual Report on Form
10-K
for the year ended December 31, 2016.
Contingencies
In
the ordinary course of our business, the Company is involved in a number of lawsuits and administrative proceedings. While uncertainties are inherent in the final outcome of these matters, the Companys management believes, after consultation
with legal counsel, that the disposition of these proceedings should not have a material adverse effect on our financial position, results of operations or cash flows.
The Company provides an Employee Retirement Savings Plan (the
Retirement Plan) under Section 401(k) of the Internal Revenue Code of 1986, as amended (the Code), that covers substantially all U.S. based salaried employees. Concurrent with the acquisition of Hudson IT, the Company
expanded employee eligibility under the Retirement Plan to include all U.S. based
W-2
hourly employees. Employees may contribute a percentage of eligible compensation to the Retirement Plan, subject to certain
limits under the Code. For Hudson IT employees enrolled in the Hudson Employee Retirement Savings Plan under the Code at the acquisition date, the Company provides a matching contribution of 50% of the first 6% of the participants contributed
pay, subject to vesting based on the combined tenure with Hudson and Mastech Digital. For all other employees, the Company did not provide for any matching contributions for the six months ended June 30, 2017 and 2016. Mastech Digitals
total contributions to the Retirement Plan for the three and six months ended June 30, 2017 related to the former Hudson IT employees totaled approximately $24,000 and $54,000, respectively. Mastech Digitals contributions to the
retirement plan for the three and six months ended June 30, 2016 related to the Hudson IT employees totaled $28,000 and $55,000, respectively.
5.
|
Stock-Based Compensation
|
In 2008, the Company adopted a Stock Incentive Plan (the
Plan) which, as amended, provides that up to 1,400,000 shares of the Companys Common Stock shall be allocated for issuance to directors, officers and key personnel. Grants under the Plan can be made in the form of stock options,
stock appreciation rights, performance shares or stock awards. During the three and six months ended June 30, 2017, the Company granted no shares under the Plan. During the three and six months ended June 30, 2016, the Company granted 0
and 250,000 stock options, respectively. As of June 30, 2017 and December 31, 2016, there were 114,000 shares in both periods available for future grant under the Plan.
Stock-based compensation expense for the three months ended June 30, 2017 and 2016 was $108,000 and $70,000, respectively, and for the
six months ended June 30, 2017 and 2016 was $215,000 and $185,000, respectively. Stock-based compensation expense is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
During the three and six months ended June 30, 2017, the Company issued 94,138 shares related to the vesting of restricted stock and the
exercise of stock options. During the three and six months ended June 30, 2016, the Company issued 4,500 shares related to the vesting of restricted stock.
On June 15, 2015, the Company entered into a First Amendment to
its Second Amended and Restated Loan Agreement (the Amendment) with PNC. The amended terms set forth in the Amendment include the following: (1) a reduction in the maximum principal amount available under the credit facility for
revolving credit loans and letters of credit from $20 million to $17 million and an extension of the facility to June 15, 2018 from July 14, 2017; (2) the addition of a term-loan component in the principal amount of
$9 million with an expiration date of June 15, 2020; (3) the approval of the Companys acquisition of Hudson IT; and (4) an
9
amendment to the financial covenant relating to the Companys fixed charge ratio and the elimination of a financial covenant relating to the Companys senior leverage ratio, as more
fully described in the Amendment filed as Exhibit 10.1 to the Companys Form
8-K,
filed with the SEC on June 17, 2015.
Advances under the credit facility for revolving credit loans were limited to a borrowing base consisting of the sum of 85% of eligible
accounts receivable and 60% of eligible unbilled receivables. Amounts borrowed under the facility could be used for working capital and general corporate purposes, for the issuance of standby letters of credit, and to facilitate other acquisitions
and stock repurchases. Initial borrowings under the revolving credit facility for the acquisition of Hudson IT totaled $6.0 million. Amounts borrowed under the term loan were limited to use for the Companys acquisition of Hudson IT.
Subject to the Company exercising its right to prepay borrowings thereunder, the term loan requires payments in 60 consecutive monthly installments, each in the amount of $150,000 commencing on July 1, 2015 and on the first day of each calendar
month thereafter followed by a final payment of all outstanding principal and interest due on June 15, 2020.
Borrowings under the
credit facility for revolving credit loans and the term loan, at the Companys election, bear interest at either (a) the higher of PNCs prime rate or the federal funds rate plus 0.50%, plus an applicable margin determined based upon
the Companys leverage ratio or (b) an adjusted LIBOR rate, plus an applicable margin determined based upon the Companys leverage ratio. The applicable margin on the base rate is between 0.25% and 0.75% on revolving credit loans and
between 1.50% and 2.00% on term loans. The applicable margin on the adjusted LIBOR rate is between 1.25% and 1.75% on revolving credit loans and between 2.50% and 3.00% on term loans. A 20 basis point per annum commitment fee on the unused portion
of the credit facility for revolving credit loans is charged and due monthly in arrears through June 15, 2018.
The Company pledged
substantially all of its assets in support of the credit facility. The loan agreement contains standard financial covenants, including, but not limited to, covenants related to the Companys leverage ratio and fixed charge ratio (as defined
under the loan agreement) and limitations on liens, indebtedness, guarantees, contingent liabilities, loans and investments, distributions, leases, asset sales, stock repurchases and mergers and acquisitions. As of June 30, 2017, the Company
was in compliance with all provisions under the facility.
In connection with securing the Amendment, the Company paid a commitment fee
and incurred transaction costs totaling $75,000, which are being amortized as interest expense over the lives of the facilities. Debt financing costs of $40,000 and $59,000 (net of amortization) as of June 30, 2017 and December 31, 2016,
respectively, are presented as long-term assets in the Companys Condensed Consolidated Balance Sheets.
As of June 30, 2017,
the Companys outstanding borrowings under the credit facility for revolving credit loans totaled $4.2 million and unused borrowing capacity available was $12.8 million. The Companys outstanding borrowings under the term loan
were $5.4 million at June 30, 2017. As of June 30, 2017, the Company believed the eligible borrowing base on the revolving credit facility would not fall below current outstanding borrowings for a period of time exceeding one year and
has classified the $4.2 million outstanding debt balance at June 30, 2017 as long-term.
As described in Note 1 above, the
Company entered into a new credit facility with PNC on July 13, 2017 and repaid all borrowings under its credit facility with PNC that was in place as of June 30, 2017. A summary of that new credit facility with PNC, as well as a copy of
the credit agreement and pledge agreement executed by the Company in connection therewith, are set forth in a Form
8-K
filed by the Company with the SEC on July 19, 2017.
The components of income before income taxes, as shown in the accompanying
Financial Statements, consisted of the following for the three and six months ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Amounts in thousands)
|
|
|
(Amounts in thousands)
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
727
|
|
|
$
|
1,428
|
|
|
$
|
924
|
|
|
$
|
1,326
|
|
Foreign
|
|
|
149
|
|
|
|
97
|
|
|
|
274
|
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
876
|
|
|
$
|
1,525
|
|
|
$
|
1,198
|
|
|
$
|
1,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
While all of the Companys revenues and income is generated within the United States, the
Company does have a foreign subsidiary in India which provides recruitment services to its U.S. operations. Accordingly, the Company allocates a portion of its income to this subsidiary based on a transfer pricing model and reports such
income as Foreign in the above table.
No provision for U.S. income taxes has been made for the undistributed earnings of its
Indian subsidiary as of June 30, 2017, as those earnings are expected to be permanently reinvested outside the U.S. If these foreign earnings were to be repatriated in the future, the U.S. tax liability may be reduced by any foreign income
taxes previously paid on such earnings, which would make this U.S. tax liability immaterial. The determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.
The provision for income taxes, as shown in the accompanying Financial Statements, consisted of the following for the three and six months
ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Amounts in thousands)
|
|
|
(Amounts in thousands)
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
95
|
|
|
$
|
315
|
|
|
$
|
162
|
|
|
$
|
510
|
|
State
|
|
|
15
|
|
|
|
30
|
|
|
|
23
|
|
|
|
64
|
|
Foreign
|
|
|
51
|
|
|
|
33
|
|
|
|
93
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
161
|
|
|
|
378
|
|
|
|
278
|
|
|
|
647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
17
|
|
|
|
176
|
|
|
|
20
|
|
|
|
(53
|
)
|
State
|
|
|
2
|
|
|
|
26
|
|
|
|
3
|
|
|
|
(8
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision (benefit)
|
|
|
19
|
|
|
|
202
|
|
|
|
23
|
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
180
|
|
|
$
|
580
|
|
|
$
|
301
|
|
|
$
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of income taxes computed using the statutory U.S. income tax rate and the provision for
income taxes for the three and six months ended June 30, 2017 and 2016 were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2017
|
|
|
Three Months Ended
June 30, 2016
|
|
Income taxes computed at the federal statutory rate
|
|
$
|
298
|
|
|
|
34.0
|
%
|
|
$
|
519
|
|
|
|
34.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
33
|
|
|
|
3.8
|
|
|
|
56
|
|
|
|
3.7
|
|
Excess tax benefit from stock options/restricted shares
|
|
|
(155
|
)
|
|
|
(17.7
|
)
|
|
|
|
|
|
|
|
|
Other net
|
|
|
4
|
|
|
|
0.4
|
|
|
|
5
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
180
|
|
|
|
20.5
|
%
|
|
$
|
580
|
|
|
|
38.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2017
|
|
|
Six Months Ended
June 30, 2016
|
|
Income taxes computed at the federal statutory rate
|
|
$
|
407
|
|
|
|
34.0
|
%
|
|
$
|
524
|
|
|
|
34.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
42
|
|
|
|
3.5
|
|
|
|
56
|
|
|
|
3.6
|
|
Excess tax benefit from stock options/restricted shares
|
|
|
(155
|
)
|
|
|
(12.9
|
)
|
|
|
|
|
|
|
|
|
Other net
|
|
|
7
|
|
|
|
0.5
|
|
|
|
6
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
301
|
|
|
|
25.1
|
%
|
|
$
|
586
|
|
|
|
38.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the beginning and ending amounts of unrecognized tax benefits related to uncertain tax
positions, including interest and penalties, are as follows:
11
|
|
|
|
|
(Amounts in thousands)
|
|
Six Months Ended
June 30, 2017
|
|
Balance as of December 31, 2016
|
|
$
|
128
|
|
Additions related to current period
|
|
|
|
|
Additions related to prior periods
|
|
|
|
|
Reductions related to prior periods
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2017
|
|
$
|
128
|
|
|
|
|
|
|
Although it is difficult to anticipate the final outcome of these uncertain tax positions, the Company
believes that the total amount of unrecognized tax benefits could be reduced by approximately $33,000 during the next twelve months due to the expiration of the statutes of limitation.
8.
|
Derivative Instruments and Hedging Activities
|
Interest Rate Risk Management
Concurrent with the Companys June 15, 2015 borrowings under the $9 million term loan facility, the Company entered into a
five-year interest-rate swap to convert the debts variable interest rate to a fixed rate of interest. Under the swap contracts, the Company pays interest at a fixed rate of 1.515% and receives interest at a variable rate equal to the daily
U.S. LIBOR rate on a notional amount of $5,000,000. Both the debt and the swap contracts mature in
60-monthly
installments commencing on July 1, 2015. These swap contracts have been designated as cash
flow hedging instruments and qualified as effective hedges at inception under ASC Topic 815, Derivatives and Hedging. These contracts are recognized on the balance sheet at fair value. The effective portion of the changes in fair value
on these instruments is recorded in other comprehensive income (loss) and is reclassified into the Condensed Consolidated Statements of Operations as interest expense in the same period in which the underlying hedge transaction affects earnings.
Changes in the fair value of interest-rate swap contracts deemed ineffective are recognized in the Condensed Consolidated Statements of Operations as interest expense. The fair value of the interest-rate swap contracts at June 30, 2017 was an
asset of $228 and is reflected in the Condensed Consolidated Balance Sheet as other current asset.
The effect of derivative instruments on the
Condensed Consolidated Statements of Operations and Comprehensive Income are as follows (in thousands):
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Derivatives in ASC Topic 815 Cash Flow
Hedging
Relationships
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Amount of
Gain / (Loss)
recognized in
OCI on
Derivatives
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Location of
Gain / (Loss)
reclassified from
Accumulated
OCI to
Income
(Expense)
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Amount of
Gain / (Loss)
reclassified
from
Accumulated
OCI to
Income
(Expense)
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Location of
Gain / (Loss)
reclassified in
Income
(Expense)
on Derivatives
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Amount of
Gain / (Loss)
recognized in
Income
(Expense)
on Derivatives
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(Effective
Portion)
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(Effective
Portion)
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(Effective
Portion)
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(Ineffective Portion/Amounts
excluded from
effectiveness
testing)
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For the Three Months Ended June 30, 2017:
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Interest-Rate Swap Contract
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$
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1
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Interest Expense
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$
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(4
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)
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Interest Expense
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$
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For the Six Months Ended June 30, 2017:
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Interest-Rate Swap Contract
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$
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12
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Interest Expense
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$
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(10
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)
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Interest Expense
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$
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For the Three Months Ended June 30, 2016:
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Interest-Rate Swap Contract
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$
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(5
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)
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Interest Expense
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$
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(11
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)
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Interest Expense
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$
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For the Six Months Ended June 30, 2016:
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Interest-Rate Swap Contract
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$
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(35
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)
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Interest Expense
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|
|
$
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(22
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)
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Interest Expense
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$
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12
Information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets
(in thousands):
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June 30, 2017
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December 31, 2016
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Derivative Instruments
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Balance Sheet Location
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|
Fair Value
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Balance Sheet Location
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Fair Value
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Interest-Rate Swap Contracts
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Other Current
Assets
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|
$
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Other Current
Liabilities
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$
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12
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The estimated amount of pretax losses as of June 30, 2017 that is expected to be reclassified from other
comprehensive income (loss) into earnings within the next 12 months is approximately ($16,000).
9.
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Fair Value Measurements
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The Company has adopted the provisions of ASC 820, Fair
Value Measurements and Disclosures (ASC 820), related to certain financial and nonfinancial assets and liabilities. ASC 820 establishes the authoritative definition of fair value; sets out a framework for measuring fair value;
and expands the required disclosures about fair value measurements. The valuation techniques required by ASC 820 are based on observable and unobservable inputs using the following three-tier hierarchy:
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Level 1 - Inputs are observable quoted prices (unadjusted) in active markets for identical assets and liabilities.
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Level 2 - Inputs are observable, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and
liabilities in markets that are not active; or other inputs that are directly or indirectly observable in the marketplace.
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Level 3 - Inputs are unobservable that are supported by little or no market activity.
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At
June 30, 2017 and December 31, 2016, the Company carried the following financial assets and (liabilities) at fair value measured on a recurring basis (in thousands):
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Fair Value as of June 30, 2017
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(Amounts in thousands)
|
|
Level 1
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|
Level 2
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|
Level 3
|
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Total
|
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Interest-Rate Swap Contracts
|
|
$
|
|
|
|
$
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0
|
|
|
$
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|
|
$
|
|
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Fair Value as of December 31, 2016
|
|
(Amounts in thousands)
|
|
Level 1
|
|
|
Level 2
|
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Level 3
|
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Total
|
|
Interest-Rate Swap Contracts
|
|
$
|
|
|
|
$
|
(12
|
)
|
|
$
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|
|
|
$
|
(12
|
)
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The fair value of interest rate swap contracts are based on quoted prices for similar instruments from a
commercial bank, and therefore, the fair value measurement is considered to be within level 2.
The Company had a Share Repurchase Program in place that
expired on December 22, 2016. During the six months ended June 30, 2017 and 2016 no shares were repurchased under a share repurchase program. During the three and six months ended June 30, 2017, the Company purchased 1,159 shares at a
share price of $6.42 to satisfy employee tax obligations related to the vesting of restricted stock. No share purchases were made to satisfy employee tax obligations related to the vesting of restricted stock during the six months ended
June 30, 2016.
11.
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Revenue Concentration
|
For the three months ended June 30, 2017, the Company had
two clients that exceeded 10% of total revenue (CGI = 13.4% and Accenture = 11.0%). For the six months ended June 30, 2017, the Company had one client that exceeded 10% of total revenue (CGI = 13.3%). For the three and six months ended
June 30, 2016, the Company did not have any clients that exceeded 10% of total revenue.
13
The Companys top ten clients represented approximately 49% and 44% of total revenues for
the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, the Companys top ten clients represented approximately 48% and 43% of total revenues, respectively.
The computation of basic earnings per share is based on the
Companys net income divided by the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if outstanding stock options were exercised. The dilutive effect of stock
options was calculated using the treasury stock method.
For the three and six months ended June 30, 2017, there were 250,000
anti-dilutive stock options excluded from the computation of diluted earnings per share. For the three and six months ended June 30, 2016, there were 250,000 anti-dilutive stock options excluded from the computation of diluted earnings per
share.
During the six month period ending June 30, 2017, the Company
incurred no severance costs. During the three and six months ended June 30, 2016 the Company incurred severance costs of $0 and $780,000
(pre-tax),
respectively, related to several changes in executive
leadership.
14.
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Recently Issued Accounting Standards
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Recently Adopted Accounting Pronouncements
In November 2015, the FASB issued ASU
2015-17,
Balance Sheet Classification of Deferred
Taxes. The Company adopted ASU
2015-17
which amends existing guidance to require presentation of deferred tax asset and liabilities as
non-current
within a
classified balance sheet. This guidance was adopted, on a retrospective basis, at March 31, 2017. Prior periods were adjusted to conform to the current period presentation.
In March, 2016, the FASB issued ASU
2016-09
Compensation Stock Compensation (Topic 718) -
Improvements to Employee Share-Based Payment Accounting. The FASB issued this ASU as part of its Simplification Initiative, which has the objective of identifying, evaluating, and improving areas of GAAP for which cost and
complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after
December 15, 2016 and, accordingly, we adopted this ASU on January 1, 2017. The adoption of this ASU resulted in the recognition of a $155,000 benefit in our provision for income taxes for the three and six months ended June 30, 2017.
Recent Accounting Pronouncements not yet adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2014-09,
Revenue from Contracts with Customers, which provides for a single five-step model to be applied to all revenue contracts with customers. The new guidance also requires additional financial
statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Entities can use either a retrospective approach or a cumulative effect adjustment
approach to implement the guidance. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. In 2016, the FASB issued ASU
2016-08,
ASU
2016-10,
ASU
2016-12
and ASU
2016-20
to amend ASU
2014-09
for technical corrections and
improvements and to clarify the implementation guidance for 1) principal versus agent considerations, 2) identifying performance obligations, 3) the accounting for licenses of intellectual property and 4) narrow scope improvements on assessing
collectability, presentation of sales taxes,
non-cash
consideration and completed contracts and contract modifications at transition. The Company is evaluating the method of adoption of this ASU, but does not
expect the adoption to have a material impact on its consolidated financial statements.
In January 2016, the FASB issued ASU
2016-01,
Financial Instruments Overall (Subtopic
825-10)
- Recognition and Measurement of Financial Assets and Financial Liabilities, which amends certain
aspects of recognition, measurement, presentation and disclosure of financial instruments. This amendment requires all equity investments to be measured at fair value with changes in
14
the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). This standard will be
effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are evaluating the impact the adoption of ASU
2016-01
will have on our consolidated
financial statements.
In February 2016, the FASB issued ASU
No. 2016-02,
Leases (Topic
842). The main difference between the current requirement under GAAP and ASU
2016-02
is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases.
ASU
2016-02
requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a
right-of-use
asset representing its right to use the underlying asset for the lease term (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of
the lease payment. The lease asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or
finance. Operating leases will result in straight-line expense (similar to current operating leases), while finance leases will result in a front-loaded expense pattern (similar to current capital leases). The classification of these leases will be
based on the criteria that are largely similar to those applied in current lease accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. ASU
2016-02
is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. ASU
2016-02
must be adopted using a modified
retrospective transition and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently assessing the potential impact of ASU
2016-02
and expect adoption will have a material impact on our consolidated financial condition and results of operations. Contractual obligations on lease arrangements as of June 30, 2017 approximated
$3.0 million.
In August 2016, the FASB issued ASU
2016-15
Statement of Cash Flows
(Topic 230) Classification of Certain Cash Receipts and Cash Payments. Current GAAP either is unclear or does not include specific guidance on eight specific cash flow classification issues included in the amendments in this ASU. The
ASU addresses these cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU
2017-04,
Intangibles Goodwill and Other (Topic 350):
Simplifying the Accounting for Goodwill Impairment, which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Under this ASU, a goodwill impairment will now be the amount by which a
reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU
2017-04
is effective for annual and interim periods beginning January 1, 2020, with early
adoption permitted, and applied prospectively. We do not expect ASU
2017-04
to have a material impact on our financial statements.
In May 2017, the FASB issued ASU
2017-09,
Compensation Stock Compensation (Topic 718):
Scope of Modification Accounting. Entities have defined the term modification in a broad manner resulting in diversity in modification accounting practice. The amendments in this Update provide guidance about which changes to the
terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after
December 15, 2017. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
A variety of proposed or otherwise potential accounting standards are currently under consideration by standard-setting organizations and
certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, management has not yet determined the effect, if any, that the implementation of such proposed standards would have on the Companys
consolidated financial statements.
On July 13, 2017, the Company completed the acquisition of the
services division of Canada-based InfoTrellis, Inc., a project-based consulting services company with specialized capabilities in data management and analytics. The acquisition is expected to significantly strengthen Mastech Digitals
capabilities to offer consulting and project-based delivery of digital transformation services. InfoTrellis, Inc. is headquartered in Toronto, Canada, with offices in Austin, Texas and a global delivery center in Chennai, India.
The transaction is valued at $55 million, with $35.7 million paid in cash at closing (subject to working capital adjustments) and
$19.3 million deferred over the next two years. The deferred purchase price is contingent upon the acquired business generating specified EBIT (earnings before interest and taxes) targets during the two years following closing.
15
The funding for the transaction consisted of a combination of debt and equity. A new
$65 million facility the Company established on July 13, 2017 with PNC Bank, N.A. (PNC) provided debt financing for the transaction, refinancing for the Companys existing debt with PNC and additional borrowing capacity
for the future. The equity financing was completed through a $6.0 million private placement of newly-issued shares of the Companys common stock to Mastechs founders and majority shareholders, Ashok Trivedi and Sunil Wadhwani.
Pursuant to the terms of the share purchase agreements executed in connection with the private placement of these shares, the Company agreed to sell such shares at a price per share equal to the greater of $7.00 or the closing price for the common
stock on July 10, 2017 (two business days after the July 7, 2017 announcement of the transaction), which was $6.35 per share. Accordingly, the common stock was sold on July 13, 2017 at a price per share equal to $7.00. The terms of
the private placement were negotiated and approved by a Special Committee of the Companys independent directors, which retained counsel and an independent financial advisor.
On July 13, 2017 and July 19, 2017, the Company filed with the Securities and Exchange Commission two Current Reports on Form
8-K
providing additional details on this acquisition and the financing arrangements.
16